[Federal Register Volume 66, Number 185 (Monday, September 24, 2001)]
[Notices]
[Pages 48893-48895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-23741]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25161; 812-12586]


The Victory Portfolios, et al.; Notice of Application

September 19, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

[[Page 48894]]


ACTION: Notice of application under section 17(b) of the Investment 
Company Act of 1940 (``Act'') for an exemption from section 17(a) of 
the Act.

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    Summary of Application: Applicants request an order to permit the 
proposed reorganization of the following series of the Victory 
Portfolios: U.S. Government Obligations Fund (``U.S. Government'') with 
and into Gradison Government Reserves Fund (``Gradison''); and 
Investment Quality Bond Fund (``Investment Quality'') with and into 
Intermediate Income Fund (``Intermediate Income''). Because of certain 
affiliations, applicants may not rely on rule 17a-8 under the Act.
    Applicants: The Victory Portfolios (``Trust'') and Victory Capital 
Management Inc. (``Adviser'').
    Filing Dates: The application was filed on July 24, 2001. Applicant 
have agreed to file an amendment during the notice period, the 
substance of which is reflected in this notice.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on October 10, 2001, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants c/o S. Elliot Cohan, Esq., Kramer Levin Naftalis 
& Frankel LLP, 919 Third Avenue, New York, New York 10022.

FOR FURTHER INFORMATION CONTACT: John L. Sullivan, Senior Counsel, at 
(202) 942-0681, or Mary Kay Frech, Branch Chief, at (202) 942-0564 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (tel. 202-942-8090).

Applicant's Representations

    1. The Trust, a Delaware business trust, is registered under the 
Act as an open-end management investment company and currently offers 
30 series, including Gradison, U.S. Government, Intermediate 
Government, and Investment Quality (each, a ``Fund.''). The Adviser, a 
New York corporation and wholly owned subsidiary of KeyCorp, is 
registered under the Investment Advisers Act of 1940 and is the 
investment adviser to the Funds. Each of McDonald & Co. Securities, 
Inc. and SNBOC and Company, each a wholly owned subsidiary of KeyCorp, 
owns of records, and may under certain circumstances have the power to 
vote, more than 5% of the outstanding voting securities of each Fund.
    2. On May 23, 2001, the board of trustees of the Funds (``Board''), 
including a majority of the trustees who are not ``interested 
persons,'' as defined in section 2(a)(19) of the Act (``Independent 
Trustees''), approved two separate Agreements and Plans of 
Reorganization and Termination (each, a ``Plan''), under which U.S. 
Government will reorganize into Gradison, and Investment Quality will 
reorganize into Intermediate Income (Gradison and Intermediate Income 
are ``Acquiring Funds,'' and U.S. Government and Investment Quality are 
``Acquired Funds''). Under the Plans, each Acquiring Fund will acquire 
all of the assets and substantially all of the liabilities of the 
corresponding Acquired Fund in exchange for shares of the Acquring Fund 
(each, a ``Reorganization''). The shares of each Acquiring Fund 
exchanged will have an aggregate net asset value equal to the aggregate 
net asset value of the corresponding Acquired Fund's shares determined 
as of the close of business on the business day preceding the closing 
date of the Reorganizations (``Closing Date''), which is currently 
anticipated to occur on October 12, 2001. On the Closing Date, each 
Acquired Fund will liquidate and distribute pro rata the classes of 
shares of the Acquiring Fund received in the Reoganization to the 
shareholders of the Acquired Fund. The value of the assets of the Funds 
will be determined in the manner set forth in the Funds' then-current 
prospectus and statement of additional information.
    3. Applicants state that the investment objectives and policies of 
each Acquiring Fund are similar to those of the corresponding Acquired 
Fund. U.S. Government offers two classes of shares, and Gradison 
currently offers only one class of shares. In connection with the 
Reorganizations, Gradison will introduce a new class, and shareholders 
of U.S. Government will receive shares of Gradison subject to the same 
sales charges and distribution fees as their current shares. Investment 
Quality and Intermediate Income both offer two classes of shares. 
Shareholders of Investment Quality will receive shares of intermediate 
Income subject to the same sales charges, distribution fees and 
shareholder servicing fees as their current shares.\1\ No sales charge 
will be imposed in connection with the Reorganizations. The Funds will 
be responsible for paying pro rata one-half of the expenses incurred in 
connection with the Reorganizations, and the Adviser will be 
responsible for paying the other one-half of the expenses.
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    \1\ A deferred sales charge may be imposed on certain 
redemptions of one class of shares of Intermediate Income and the 
corresponding class of shares of Investment Quality. Following the 
Closing Date, shareholders of Investment Quality, who purchased 
shares that would have been subject to the deferred sales charge 
upon redeeming their shares had the Reorganization not occurred, can 
redeem their shares of Intermediate Income received in the 
Reorganization without the imposition of a deferred sales charge.
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    4. The Board, including a majority of the Independent Trustees, 
determined that the Reorganizations are in the best interests of the 
Funds and their shareholders and that the interests of the existing 
shareholders would not be diluted by the Reorganizations. In approving 
the Reorganizations, the Board considered various factors, including: 
(a) The investment objectives, policies and limitations of the 
Acquiring and Acquired Funds: (b) the terms and conditions of the 
Reorganizations; (c) the tax-free nature of the Reorganizations; (d) 
the expenses of the Acquiring and Acquired Funds; and (e) the economies 
of scale that are likely to result from the larger asset base of the 
combined Funds.
    5. The Reorganizations are subject to a number of conditions, 
including that: (a) the shareholders of each Acquired Fund approve the 
respective Plan; (b) the Acquiring and Acquired Funds receive opinions 
of counsel that the Reorganizations will be tax-free for the Funds, and 
(c) applicants receive from the Commission an exemption from section 
17(a) of the Act for the Reorganizations. Either Plan may be terminated 
by the mutual consent of the Acquiring and Acquired Fund or by either 
Fund in the case of a breach of the Plan. Applicants agree not to make 
any material changes to either Plan without prior approval of the 
Commission or its staff.
    6. The mailing of the combined prospectus and proxy statement to 
shareholders of the Acquired Funds began on July 24, 2001, and 
definitive proxy materials were filed with the

[[Page 48895]]

Commission on July 24, 2001. The shareholders of Investment Quality 
approved the Reorganization at a meeting held on September 13, 2001. 
The meeting of shareholders of U.S. Government is scheduled for 
September 27, 2001.

Applicants' Legal Analysis

    1. Section 17(a) of the Act generally prohibits an affiliated 
person of a registered investment company, or an affiliated person of 
such a person, acting as principal, from selling any security to, or 
purchasing any security from, the company. Section 2(a)(3) of the Act 
defines an ``affiliated person'' of another person to include, among 
others: (a) Any person directly or indirectly owning, controlling, or 
holding with power to vote 5% or more of the outstanding voting 
securities of the other person; (b) any person 5% or more of whose 
securities are directly or indirectly owned, controlled, or held with 
power to vote by the other person; (c) any person directly or 
indirectly controlling, controlled by, or under common control with the 
other person; and (d) if the other person is an investment company, any 
investment adviser of that company.
    2. Rule 17a-8 under the Act exempts from the prohibitions of 
section 17(a) mergers, consolidations, or purchases or sales of 
substantially all of the assets of registered investment companies that 
are affiliated persons, or affiliated persons of an affiliated person, 
solely by reason of having a common investment adviser, common 
directors/trustees, and/or common officers, provided that certain 
conditions set forth in the rule are satisfied.
    3. Applicants believe that they may not rely on rule 17a-8 in 
connection with the Reorganizations because the Funds may be deemed to 
be affiliated by reasons other than having a common investment adviser, 
common directors/trustees, and/or common officers. Each of McDonald & 
Co. Securities, Inc. and SNBOC and Company owns of record, and may 
under certain circumstances have the power to vote, more than 5% of the 
outstanding voting securities of both Acquiring Funds and Acquired 
Funds. Accordingly, each Acquiring Fund may be deemed an affiliated 
person of a affiliated person of its corresponding Acquired Funds for a 
reason other than having a common investment adviser, common directors/
trustees and/or common officers.
    4. Section 17(b) of the Act provides that the Commission may exempt 
a transaction from the provisions of section 17(a) if evidence 
establishes that the terms of the proposed transaction, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching on the part of any person concerned, and that 
the proposed transaction is consistent with the policy of each 
registered investment company concerned and with the general purposes 
of the Act.
    5. Applicants request an order under section 17(b) of the Act 
exempting them from section 17(a) to the extent necessary to complete 
the Reorganizations. Applicants submit that the Reorganizations satisfy 
the standards of section 17(b). Applicants state that the 
Reorganizations will be based on the relative net asset values of the 
Acquiring and Acquired Funds' shares. Applicants also state that the 
investment objectives and policies of the Funds are similar. Applicants 
state that the board, including the Independent Trustees, has made the 
requisite determinations that the participation of the Acquiring and 
Acquired Funds in the Reorganizations is in the best interests of each 
Fund and that such participation will not dilute the interests of the 
existing shareholders of each Fund.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-23741 Filed 9-21-01; 8:45 am]
BILLING CODE 8010-01-M